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Scrubbers for Bulgaria's Maritza coal-plant cut SO2 emissions

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The project has everybody's blessing.

Maritza East III Power Plant.

10 banks fund retrofit of Bulgarian coal-fired power plant

If the number of signatures and the length of a signing ceremony are any indication of the complexity of a project, the €650 million Maritza East III (MEIII) deal in Bulgaria is a mind-boggling financial venture. After six years of negotiation, it took two entire days for 11 parties to put two signatures on each of 13 financial documents, with parallel signing of project documents taking place in a separate room.

The rehabilitation and environmental retrofit of the 840 megawatt MEIII is vital if Bulgaria is to meet European Union (EU) environmental standards, a pre-condition for EU membership. In the 1990s Maritza's three power units were identified as Europe's number one environmental 'hotspot' for sulphur pollution. Locally-mined lignite coal, high in sulphur and ash content, is burned to fuel the power plants.

"The sulphur dioxide emissions have wide impact across Europe," explains Lutz Blank of EBRD's Environment Department. "The SO2 causes acid rain which harms vegetation, from crops to forests; damages buildings; and acidifies surface water. Around Maritza, the dust from the nearby coal mines and ash from burning the coal may well have a serious impact on the health of the local population. When I first visited the area some years ago it was so bad that if you gritted your teeth and sucked in air, your teeth were immediately covered with grit."

Bulgaria depends on coal

Bulgaria is currently decommissioning its decaying Kozloduy nuclear facilities, so the country has had little choice but to continue exploiting lignite which makes up 80 per cent of domestic fuel reserves. MEIII accounts for seven per cent of the country's installed generating capacity and is located near vast coal mines outside the southern city of Stara Zagoara, 60 km from the Turkish border.

The investment will fund scrubbers for Maritza's smoke stacks, to reduce sulphur dioxide emissions by up to 95 per cent; filters will cut dust emissions by 99.5 per cent. The new plant will not only meet EU standards but also Bulgarian and World Bank environmental standards for existing plants.

First private power project

This complex investment, in which the EBRD has a €112.1 million stake, is the first private power sector project in Bulgaria. It's also the largest foreign investment in Bulgaria to date. So it's hardly surprising that Simeon Saxe-Coburg-Gotha - Bulgaria's former boy-king and its current prime minister - took an entire day from his schedule to attend the marathon signing ceremony.

That the EBRD and several international and Bulgarian commercial banks* managed to arrange €348 million in senior debt for MEIII is astonishing, given the state of investment in the power sector generally. (The remainder of the project cost will be financed through cash flow from the project.)

"Many smaller countries have only recently started to open their power markets up to the private sector so it's not easy to attract investors to such untested waters," explains senior banker Nandita Parshad, EBRD's operational leader on the transaction. "Meanwhile private money has been pulling out of western power markets because of the corporate governance scandal at Enron (the US-based global power company) and because so many investments in the deregulated UK and US energy markets have lost money."

Two years ago, after four years of bargaining, the original American sponsor, Entergy, decided to reduce its involvement in MEIII and other European projects, in order to focus on US prospects. All the same Entergy was so enthusiastic about MEIII that they found another sponsor, the Italian firm Enel. The two are now joint owners of MEIII along with NEK, the Bulgarian state-owned transmission company. The EBRD, through the EU Phare programme, provided a grant of €1 million to NEK to finance legal and financial advisors to facilitate NEK's negotiations with Entergy. This grant ensured that NEK was able to get professional, international expertise to help them negotiate a fair power purchase agreement.

Improved credit rating

Since this project was first conceived, Bulgaria has changed tremendously: its credit rating has improved and in March 2002 it adopted a new national energy strategy, detailing key developments in the power sector. "These developments allowed us to structure the project to make it attractive to financiers while taking into account developments in the Bulgarian power sector," says Ms Parshad.

In fact this project is the first time four Bulgarian banks have provided such long term financing (12 years), which highlights the strengthening of the local financial sector following the recent Bulgarian bank privatisations.

Difficult choices

Despite its dire environmental record, closing MEIII down was not an option for Bulgaria's energy planners. Doing so would have meant the loss of MEIII's 840MW of thermal power on top of 1600MW lost in decommissioning the Kozloduy Nuclear Power Plant. Hundreds of people would have been out of work.

Instead MEIII has emerged as a key element in the country's overall strategy for developing and privatising Bulgaria's power sector. According to a market study, rehabilitating MEIII is the least expensive option for Bulgarian energy sector development.

"The beauty of MEIII is the plant will only be partially shut down during the retrofit," said George Giaouris, associate banker in the Power and Energy Team. "During that time power output will be slightly lower, but after the completion the plant will have higher capacity. By rehabilitating MEIII, Bulgaria will be able to keep its coal miners employed, and thousands of jobs will be created because of local business development initiatives related to the project."

Powerful ripple-effect

Anthony Marsh, director of the Power and Energy Utilities team, says the project is extremely important for Bulgaria and hails it as a "groundbreaking private transaction with a high demonstration effect throughout the region".

While it took a long time to develop and finance the MEIII project, it has emerged as a heartening example of a competitively priced and environmentally-oriented power project, with a sound structure and good risk spread.

*Key parties involved: Maritza East III Power (borrower); Entergy and Enel (sponsors); NEK: (sponsor and offtaker under the Power Purchase Agreement); Consortium of DSD Dillinger Stahlbau GMBH and RWE Industrie-Losungen GMBH: (EPC contractor); Forrestaal Aktiengesellschaft, (a subsidiary providing parent guarantee to the EPC contractor); Mini Maritza Iztok EAD (a lignite supplier); Credit Agricole Indosuez and Societe Generale Investment Banking (acting as the agent): parallel commercial bank lenders and joint lead arrangers of the financing package with the Bank; MIGA (providing political risk cover to the commercial banks); BSTDB, (a cofinancier arranged by the Bank); Government of Bulgaria (providing Support Letter).

The EBRD facility consists of a loan to the Maritza East III Power Company in the amount of up to €132.1 million, of which €20 million has been sold on to the Black Sea Trade and Development Bank. Commercial banks, Credit Agricole Indosuez, SG Investment Banking and Banca Mediocredito underwrote €140.7 million,and successfully syndicated most of it. The remaining €75 million has been provided by four Bulgarian Banks: Bulbank, UBB, Biochim and SG Expressbank.

Contact: EBRD Power & Energy team

4 July 2003